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1/10/96

Democratic, Republican economists analyze '96 campaign issues

SAN FRANCISCO --The current federal budget battle is merely an exhibition game before a decade-long season of slashing government liabilities, Republican and Democratic economists seemed to agree at a session of the American Economics Association at the San Francisco Hilton on Saturday, Jan. 6.

The three-day annual meeting of the 20,000-member association of practicing economists drew approximately 6,000 social scientists and students to San Francisco, where Stanford economist Victor Fuchs handed off the organization's presidency to Stanford economist Anne Krueger.

In his presidential address, Fuchs, a health economist, focused on the limited impact of economists on the 1994 debate over health care reform. He presented results of a survey that he conducted last year which indicated health economists have been less influential than they might hope at persuading two groups - medical doctors and economic theorists - to accept basic conclusions of research on the economics of health care.

Two other Stanford economists, Michael Boskin and John Taylor, both economic advisers to President Bush, represented the Republican side in a discussion of economic issues for the 1996 presidential and congressional campaigns. Democratic points of view were represented by similarly prominent East Coast economists - Harvard's Lawrence Summers, currently deputy secretary of the U.S. Treasury, and M.I.T.'s Rudiger Dornbusch, who was active in Clinton's 1992 campaign. (Boskin reminded the audience of 400 social scientists and students that Stanford also has economists who are active in Democratic politics, notably Joseph Stiglitz, the current chair of Clinton's Council of Economic Advisers.)

During the panel discussion of the '96 campaign, the Republican and Democratic economists largely agreed on the dearth of short-term economic troubles for which challengers can blame incumbents. They emphasized instead the philosophical differences of their parties in coping with longer term economic problems related to the nation's slower economic growth since the mid 1970s, growing income inequality and growing government spending on entitlement programs.

In the short term, Boskin forecast, the economy would experience slow to moderate growth, with unemployment "picking up a little but not enough to be a big issue" in the 1996 campaigns. Voters, he said, tend to blame incumbents for cyclical downturns not really attributable to incumbents, and credit them somewhat with upturns. If television news stations apportioned camera time by real impact on the economy, he said, "they would spend more time in Silicon Valley than in Washington."

Summers painted the economy as the best it has been in a decade and agreed that the main factor probably is not government per se but the "tremendous flexibility" of the U.S. economy. He credited the Clinton administration, however, with managing the economy well by reducing the cyclically adjusted deficit from 1992 levels and signing two major free trade agreements. Dornbusch added that the Treasury Department deserved credit for bringing interest rates down in the bond market. He forecast a slight "warming of the world economy" before the November 1996 elections, which, he said, might be "just the right blip at the right time to get the president re-elected."

Dornbusch, however, repeatedly criticized Clinton's labor secretary, Robert Reich, for a recent opinion piece in the New York Times that suggested using tax breaks to discourage corporations from downsizing their work forces. Dornbusch called this a "terribly stupid . . . tax shelter for companies nice enough to retain all redundant workers forever." Summers preferred to stress administration proposals for funding education and retraining programs and continuing the safety net in response to what he said is an important campaign issue - the insecurity Americans feel about their jobs and future income.

Taylor, a macroeconomist who is well known on Wall Street for developing a rule by which to predict the Federal Reserve Bank's moves on interest rates, emphasized the importance of "dis-inflation" in the Reagan administration to the health of the economy today. Neither political party is interested in bringing back double-digit inflation, he said, which means voters should focus on the difference in the two parties' policy proposals for promoting long-term economic growth.

Taylor claimed that Republicans are more likely to have the right formula: greater federal budget cuts, more deregulation and possibly a flat tax to replace the income tax. The latter, he said, would raise private saving for capital investment in the private sectors of the economy.

Summers said tax cuts in the 1980s did not result in greater private saving, and that the flat tax would "exacerbate those income inequalities that the market is already producing" by reducing taxes on the rich and increasing them on middle-class families. "Equity issues are important as well as efficiency issues," Summers said.

Dornbusch contended the Democrats' proposals for "phased" federal budget reductions would be more effective for long-term economic growth than the Republicans' "ax" approach.

"The big issue is income inequality and the underclass," Dornbusch said. "Two-thirds of the answer is to have more of a market in everything, including the government," he said, but market competition in areas dominated previously by government should be phased in to avoid too much social upheaval and income inequality.

Taylor contended that income inequality would be reduced by increasing economic growth. In the 1970s, he said, "we saw a slowdown in economic growth precisely at the time we had the rise in inequality."

Boskin and Dornbusch agreed that cutting the federal budget, especially entitlement programs, is essential over the next 10 to 15 years, but they conveyed a different sense of urgency. The Republican economist said he feared destabilization of the U.S. democracy around 2025 if the politicians do not make major budget cuts before the baby boom reaches retirement. At that point, he said, there will be more voters who are net recipients of federal funds than there are voters who are net taxpayers.

Dornbusch said that other Western democracies have a more urgent problem with entitlement programs, and that the United States has a decade left to phase in reform. "It is totally clear that every year we have to do more, as people better understand what's around the corner," Dornbusch said.

Summers contended that "how we balance the budget matters as much as whether it is balanced." For example, public spending on medical care for the elderly, he said, should not be capped while private spending continues to rise. That would produce growing medical care discrimination against the elderly.

Boskin emphasized instead that the elderly have a higher per capita income than the rest of the U.S. population.

-kpo-

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